UBS’s Australia economics research team headed by Scott Haslem in a note titled “Housing outlook: ring the bell, we’re calling the top” is calling the top of the Australian housing market. In a research note published at the end of last week, the team lays out its case for why the market cannot go much higher in the near term and why they believe a substantial correction of property prices is likely.

This Is The Top Of The Australia Housing Market

The team notes that even though the traditional trigger for a housing downturn (interest rate hikes from the central bank) is missing, there is still evidence to support the bear case for Australian housing. Specifically, housing affordability is at one of its lowest levels ever recorded, and household debt is at a record high. The Australian household debt to income ratio has surged to a record high of 190% and household debt to GDP ratio, at 123%, is near the highest in the world.

However, low interest rates are keeping household debts affordable. Household interest payments remain near a 12-year low at 8½% of income, albeit households have never been more sensitive to even a small rise in interest rates ahead. Mortgage affordability is also falling. UBS points out the mortgage repayment share of income for a new buyer – assuming principal & interest & 80% LVR on a median-priced home recently hit 28%, the highest level since 2008 and well above its long term average 23%.

The house price-income ratio has risen to a record six and half times. At the same time, the sentiments towards housing has dropped to a record low. According to the various surveys conducted by Australian entities, the stand-alone question asking if it is a ‘Good time to buy a dwelling’ has remained depressed since 2015, and recently fell further to >20% below its long-run average.

But despite all of this seemingly negative data, buyers continue to push home prices higher. Home price growth surged during the first quarter hitting a seven-year high of 13% year-on-year, unsustainably four times faster than income growth.

Australia Housing Market

Against this backdrop, the analysts at UBS see home price growth falling to 7% for 2017 as a whole and 0% to 3% for 2018, amid “record supply & poor affordability, with the new buyer mortgage repayment share of income spiking to a decade high.”

UBS opines:

The share of consumers who nominated the ‘wisest place for savings’ as real estate also slumped to a record low, suggesting fears of a housing bubble/correction are now (unusually) outweighing the RBA’s rate cuts to a record low

Access to easy credit will keep home prices rising but a moderation in homebuilding activity is expected as the market cools. UBS is predicting a 30% peak-trough drop in commencements, similar to prior cycles of 30% to 40%. But the lack of RBA rate hikes reduces the likelihood this evolves into a crash, where commencements plunge to prior cycle lows closer to 120k 130k (down from a 2016 record of 232k), which would lead to a weaker labour market & falling prices.